Deciphering the VA Lender’s Handbook Chapter 5 Part 8
In the last article, we talked about the steps that must be taken after approval for an assumption has been received from the VA. The process essentially involves correctly documenting the assumption, paying the VA funding fee, and notifying the VA that the assumption has taken place. But not all assumptions are approved by the VA before they take place. These assumptions are done without the knowledge of the loan servicer but can still be legally binding if the deed to the property has changed hands. In this article, we’ll be going into depth about this scenario and what actions the servicer can take if it is discovered that an assumption has taken place that was not approved beforehand.
If a servicer learns that a transfer (assumption) took place without prior approval, they have 60 days to notify the VA. That notice must let the VA know the servicer’s intended course of action. The servicer can immediately refer the case to foreclosure or give the seller and buyer the opportunity to apply for retroactive approval. The servicer can also decide to demand immediate payment of half of the VA funding fee that the buyer would have had to pay at the time of transfer. The remainder would be paid once the assumption is approved. The servicer will also need to learn the legal liability of the buyer, so will require a copy of the instrument of transfer in order to review it and determine the liability.
The buyer’s liability is very important to determine because it helps the servicer know which route may be the best to go in getting the situation resolved. If the buyer has assumed liability of the mortgage, then it is best to give the buyer the opportunity to apply for retroactive approval. As long as the buyer pays the funding fee, has assumed all of the seller’s obligations in the transfer, has used language that is legally binding in the assumption, and appears to intend to satisfy those obligations, then he or she will most likely be given an opportunity to apply for retroactive approval. Most of the really unpleasant situations occur when the buyer has not assumed liability.
If liability wasn’t assumed by the buyer, that means that the title was transferred “subject to” the mortgage or deed of trust. In this case, the buyer has no liability on the loan and no liability for the funding fee. As a servicer, it is impossible to predict whether the buyer with zero liability will really be motivated to make their monthly mortgage payment. The servicer certainly can still give the buyer the chance to apply for retroactive approval, but often this situation is taken care of much more quickly and with fewer headaches (and dollars lost) for the servicer just by taking it immediately to foreclosure.
If the servicer gives the buyer and seller the opportunity to apply for retroactive approval, and they decide to do so, the process is actually very similar to the approval process for a normal approval. In fact, it is completed in the same manner, including the right to appeal a disapproval. If a purchaser does not cooperate in the retroactive approval process, the servicer can accelerate the loan. The servicer must stay in accordance with state law and is advised to consider acceleration compared to letting the normal payments continue to be made on time. The servicer must report their decisions to the VA.
Loans “…for which a commitment was made prior to March 1, 1988,” are the exception to everything above. Loans made before that date are known as freely assumable loans and the owners can sell the property under whatever terms they wish, and a servicer cannot charge them any fees or put any restrictions on the sale. The exception to this exception is if the loan was made by a government agency that requires acceleration of the maturity of the loan when it is sold or transferred. A veteran looking to let someone assume their VA loan should keep in mind that even being released from liability on the loan does not restore their VA entitlement.